lean six sigma for manufacturing industry - bain & company - 2008

8/9/2019 Lean Six Sigma for Manufacturing Industry - Bain & Company - 2008

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Making the most ofLean Six Sigma

Lean Six Sigma

for manufacturingBy Peter Guarraia, Gib Carey, Alistair Corbett, and Klaus Neuhaus



Copyright © 2008 Bain & Company, Inc. All rights reserved.

Editorial team: David Diamond, Elaine Cummings

Layout: Global Design

Peter Guarraia is a partner in Bain & Company’s Los Angeles office,

Gib Carey is a partner in Chicago, Alistair Corbett is a partner in Toronto,

and Klaus Neuhaus is a partner in Düsseldorf.



1

Lean Six Sigma for manufacturing

Making the most ofLean Six Sigma

Despite its popularity, Lean Six Sigma often

fails to deliver. Manufacturers are finding an

upfront diagnostic X-ray improves their odds

of streamlining operations and cutting costs.

As a methodology for improving both factory

output and quality, Lean Six Sigma (LSS) has

gained widespread popularity. The approach,

which aims to help companies create leaner

manufacturing operations and boost product

quality to no more than 3.4 defects per mil-lion opportunities, has delivered significant

improvements and cost savings at companies

as diverse as General Electric Co., Dell Inc.,

Xerox Corp., and Johnson & Johnson.

But for every Lean Six Sigma success story

there are tales of dissatisfaction. Many organi-

zations have trained and deployed legions

of Lean Six Sigma experts, known as black

belts, only to see little value result from their

efforts. In a recent Bain & Company manage-ment survey of 184 companies, 80 percent

say their Lean Six Sigma efforts are failing to

drive the anticipated value, and 74 percent

say they are not gaining the expected competi-

tive edge because they haven’t achieved their

savings targets.

Drilling deeper, we discovered that mobiliz-

ing large and costly squads of black belts in

some cases actually slows down performance

improvement efforts. Managers are unsurehow best to deploy the Lean Six Sigma experts

and too often black belts treat all problems,

big and small, with the same approach, result-

ing in less-effective solutions. Moreover, they

fail to prioritize the improvements that will

make the biggest difference.

This last issue is particularly vexing to com-

panies as they search for ways to reduce

costs or boost revenues. While Lean Six

Sigma can be excellent at remedying obvi-ous maladies like factory bottlenecks, it is

less adept at uncovering the hidden sources

of pain and identifying and sizing the largest

opportunities for cost savings, waste reduc-

tion, or revenue generation. It’s wasteful and

unnecessary to run every process through

Lean Six Sigma; knowing where to focus

before unleashing the black belts can make

all the difference.

We’ve found companies that are yielding thebiggest gains from Lean Six Sigma are deploying

an upfront diagnostic X-ray to help them identify

the most critical opportunities. Performed by a

small advance team of black belts, the diagnostic

X-ray consists of three steps:

1. Enterprise Value Stream Mapping , in which

the X-ray team scans the enterprise and maps

its primary processes to identify the biggest

opportunities to reduce cost by reducing wast-

ed time and materials.

2. Benchmarking , in which the performance

of processes is measured against internal

and external benchmarks to measure short-

comings and establish performance-improve-

ment targets.

3. Prioritizing , in which the X-ray team

determines which process improvements

will yield the greatest results when the Lean

Six Sigma teams are deployed.

Only after the X-ray has identified the most

pressing issues, do companies unleash the

black belts and begin the traditional five-step

Lean Six Sigma DMAIC process—Define,

Measure, Analyze, Improve, and Control—on



2


the targeted areas. For example, an X-ray

taken by an industrial equipment manufac-

turer of its manufacturing operations uncov-

ered three processes ripe for improvement:welding, painting, and deburring (removing

rough parts on metal). With these areas

identified and a Lean Six Sigma black belt

appointed to spearhead each initiative, the

company moved into the full DMAIC process.

In this case, the Define step, the first in the

DMAIC process, included the black belts tak-

ing a step back and identifying what needed

to be accomplished in the welding, painting,

and deburring processes—and what parts of those processes they didn’t need. Ultimately,

the industrial company was able to reduce

the cost of producing each unit by over 15

percent and reduce the time it took to actu-

ally produce each unit by nearly 30 percent.

A diagnosis that identifies top priorities

To help fund innovation and roll out a prom-

ising new product line, a multibillion-dollar

consumer products manufacturer we’ll call

ConsumerCo urgently needed to increase

capacity at two of its plants and reduce over-

all operating costs. To determine where to

focus its efforts, the company added the

X-ray step and it paid off: the company

handily surpassed its goals for increasing

capacity and efficiency. At one plant alone,

ConsumerCo was able to reduce changeover

time on a key packaging machine from 12

hours to 20 minutes. This improvement

along with other similar changes added up

to a 15 percent reduction in the cost of

producing each package and a 25 percent

increase in capacity. The savings enabled

the company to fund innovation.

1. Enterprise value stream mapping

The first move taken by the X-ray team is to

develop a map of the operation’s processesand the costs associated with them. The goal

is to understand what activities a company

performs and where inefficiencies or per-

formance gaps might exist.

ConsumerCo’s X-ray team began its work

by mapping its production process, with the

aim of developing a comprehensive per-

spective on what the company was trying

to achieve in each manufacturing step—and

what activities were actually being performed.In the value stream mapping process the team

worked on identifying capacity at each step,

understanding the relationships between the

steps, and hypothesizing about bottlenecks

and other sources of waste in the process.

In addition, the team culled data from the

machines themselves, as well as from direct

observation. That way, it was possible to see

both the performance gaps as well as the

wasted time and material in the process andthen start to break down the reasons: equip-

ment not operating at full speed or not run-

ning due to breakdowns, changeover time,

or lack of raw materials. The plant finance

group helped the diagnostic team allocate

costs to each major process step. Some costs

were straightforward—like equipment-opera-

tor labor rates—while other costs needed

detailed investigation. For example, wasted

raw materials had to be measured at each step.

With the value-stream maps in hand, the

team could see where the biggest expenses

lay—and where improved performance would

deliver the greatest cost savings the fastest.



3


2. Benchmarking

Determining just how much performance

might be improved is the purpose of the sec-ond step of the X-ray. The aim of this phase is

to establish valid benchmarks, both external

and internal, for each process to identify

appropriate performance-improvement targets.

In comparing its labor and asset productivity

with that of its lowest-cost US competitor,

ConsumerCo discovered that it needed to

make considerable gains to become com-

petitive. The diagnostic team drew on its

members’ previous experiences outside thecompany to assess the extent to which some

processes were underperforming.

In addition to gauging its performance

against these external benchmarks, the com-

pany looked inside its own walls for relevant

internal benchmarks. For instance, the team

compared the cost of producing a package at

the two facilities it hoped to improve against

the cost of producing a similar product at its

other plants. Not only did the exercise put

some hard figures to what the team alreadysuspected—costs were out of control at the

two facilities—but it also provided reasonable

targets for improvement.

3. Prioritizing

In this final phase of the X-ray, the team decides

which problems to pursue in which order.

ConsumerCo’s X-ray team identified 45 pos-

sible performance-improvement initiativesin its six-week scan of the business and then

ranked them according to their potential

for providing the greatest increase in out-

put at the lowest cost in the shortest time.

Initiatives that tackled problems shared

across processes received a higher rank

because of their potential to improve multi-

ple processes simultaneously.

Many companiesha ve adopted Lean...

... and Six Sigma...... but struggle toachieve results

% of respondents* (N=668)

100%

80

60

40

20

0

100%

80

60

40

20

0Lean as primary plantimprovement method

36%

% of companies usingsix sigma

49%

36%

23%

Total

Large(>$2B)

Medium($.6B to

$2B)

Small(<$.6B)

% of companies thatstrongly agree (N=182)

100%

80

60

40

20

0

19%26%

Lean:Our processesinvolve minimalnonvalueadded

activities

Six Sigma:Our low defectrate providescompetitiveadvantage

*Note: Predominantly manufacturing companies; 25% with rev. > $100M, 75% below Source: PI Diagnostic Survey, n=182; Tools and Trends Survey, n=960; 2005

IW/MPI Census of Manufacturers by Industry Week

Figure 1: Lean Six Sigma problem: many have adopted but few are satisfied with results



5


For an aircraft manufacturer: Reducing

inventory to improve cash flow

A major aircraft-parts manufacturer faced alooming financial crisis and urgently needed

to free up more cash to invest in the busi-

ness. The company was losing out on new

contracts because of high costs, largely due

to low inventory turnover. As a result, it was

losing money. While the aircraft-parts manu-

facturer knew that improving inventory

turnover was critical, it didn’t believe that

could be achieved without running low on

essential parts. The company’s inventory

turnover rate was 2.7x compared with its UScompetitor’s 4x turnover rate. A diagnostic X-

ray quickly exposed a key fact: The low inven-

tory turnover was just one symptom of broad-

er inefficiencies in the management of its

parts supplies.

The diagnostic team started with a thorough

value stream mapping of the supply flow.

The mapping allowed the company to clearly

see the root causes that were driving up

expenses. Among the problems: too manysuppliers and a large support staff. Next, the

team used benchmarking to compare costs,

both internally and against industry stan-

dards. It showed that the employee head-

count and overtime were about double the

US industry average. Initiatives then were

drawn up for each possible improvement

and prioritized based on cost savings that

each could produce. The company wanted to

use Lean Six Sigma to lower supply quanti-

ties, speed deliveries, and reduce factory-floordelays. Finally, the diagnostic team tied each

initiative to metrics that allowed the company

to track progress against clear milestones.

Only then were the black belts deployed on

the targeted areas. The approach improved

inventory turnover by 40 percent in two

years. It also freed up $100 million to $175

million in the first year alone. With the sup-

ply chain working more efficiently, the com-

pany was able to save another $20 million by

reducing its headcount. Once back on sound

financial footing, the aircraft-parts manufac-turer was able to plow almost $200 million

back into the business to help regain its com-

petitive edge.

For a circuitboard manufacturer:

Optimizing worldwide production

When a global circuit-board manufacturer

was acquired, the new private equity owners

set ambitious goals to improve financial per-

formance. It was a major challenge since the

circuit-board manufacturer’s production plants

ranged widely in their performance—the US

plants were moneymakers, while the UK fac-

tory was in the red, and other plants weren’t

operating at full potential.

To accelerate the Lean Six Sigma process, the

company decided to first perform a diagnostic

X-ray so that it could zero in on the root caus-

es driving losses and determine which initia-

tives would deliver the strongest, and fastest,

financial results. The X-ray team started with

an enterprise value stream mapping of global

operations, spending 12 weeks observing pro-

duction practices on the shop floor in each

plant, and gathering detailed data on staffing

and other performance indicators. It broke

out staffing for each part of the circuit-board

production process, allowing the team to see

how, with better production planning, the

company could trim employee costs. The

mapping also showed that circuit-board pro-

duction was seriously hindered by unclean

conditions and cluttered, disorganized prod-

uct processes and workplaces.

During the prioritizing phase, the X-ray team

developed five key initiatives to speed pro-

duction and reduce costs by standardizing

steps in the production process. With these

standardized targets in place, employees at



6


every factory would be working toward the

same productivity targets. Some changes

were as straightforward as posting steps on

a bulletin board that employees should fol-low for keeping areas clean and organized.

The tightly focused initiatives helped make

the circuit-board manufacturer more compet-

itive, efficient, and profitable. Over 12 months,

productivity at the US and German plants

improved by 24 percent and 19 percent, respec-

tively; inventory was reduced by more than 55

percent, and the company closed its UK plant,

stemming the flow of red ink. For the new

private equity owners, the improvements inglobal operations translated into more than a

seven-point increase in profits. Perhaps more

important, initially skeptical managers and

employees became believers and started set-

ting ambitious improvement targets for the

following year.

For an industrial equipment manufacturer:

Quick ways to efficiency and savings

A large, international equipment manufac-

turer had tried unsuccessfully to use Lean Six

Sigma to combat quickly rising manufactur-

ing costs. Its black belts’ efforts to improve

problematic assembly processes had made

minimal progress. Almost all parts were over

budget and behind schedule. To meet dead-

lines, the company was spending heavily on

rush deliveries, but even then assemblies

often did not get completed on time. As a

result, the equipment maker’s expenses were

double world-class best practices. When

launching a new process improvement cam-

paign, the company wanted to prioritize its

efforts against areas of largest opportunity.

The diagnostic X-ray allowed the company to

shift from the theoretical to a concrete plan

of action for cost-saving initiatives, with the

diagnostic team creating a methodology for

identifying and testing solutions. In the value

stream mapping phase, industrial engineers

and subject matter experts spent more than

700 hours observing plant activities to pin-

point wasted time and ways to streamlineprocesses to reduce labor costs. Focusing on

component fabrication—an area of the plant

where parts were assembled—they walked

the plant floor, interviewing shop floor super-

visors and gathering process flow informa-

tion for each manufacturing step, plotting

the time spent and the resulting productivity.

Such detail allowed the X-ray team to bench-

mark processes and identify root causes of

the manufacturer’s soaring materials andlabor costs. For example, the mapping showed

that the major reason so many parts had to

be reworked was because too often they were

lost or damaged. The process also was slowed

because many parts weren’t made to the right

specifications and needed to be modified.

In addition, the team observed, identified

and began to isolate significant amounts of

non–value-added activities that were occur-

ring in the production process. By comparing

procedures with best practices, the diagnosticteam created benchmarks for improvements

and tied them to performance measures so

they could be tracked.

The X-ray team prioritized possible improve-

ments by weighing estimated future value

against ease of implementation. Those improve-

ments with the highest overall payback went

to the top of the list. Finally, the team created

two tools to increase the effectiveness of the

black belts: a Savings Valuation Frameworkto help prioritize future initiatives, and an

Optimal Lean Six Sigma structure that would

improve communication and skills and keep

work aligned with goals. With a clearly defined

action plan in hand, the company executed

eight process-improvement pilots and imple-

mented successful initiatives, resulting in

labor savings of around 3.5 percent. Additionally,



7


they established a repetitive process of identi-

fying, validating, and roll ing out new initia-

tives that target 3 percent to 5 percent annu-

al savings.

For an electronics market leader:

Accelerating innovation

A major electronics manufacturer faced

competitive pressures to innovate faster,

more efficiently, and to consistently tie its

technology research to the company’s core

market strategy. To accelerate innovation

and improve performance, the company

embarked on a three-month diagnostic X-ray

aimed at ultimately redesigning ad hoc labora-

tory processes and better aligning research

projects to the needs of business units.

The X-ray team mapped three core research

processes: how researchers identified tech-

nology areas to investigate, allocated their

resources, and handed off technology proj-

ects as they moved through the R&D pipeline.

The analysis involved detailing how tech-

nology concepts were picked, how projects

were staffed at every step of the way, how

researchers decided to shelve or continue

researching an innovation, and what sup-

port was provided as projects were handed

off for development.

The mapping helped focus the X-ray team’s

benchmarking efforts on internal and exter-

nal research capabilities. They compared each

company lab’s budget, how the labs priori-

tized projects, the mix and number of proj-

ects, their research strategies—especially time

spent investigating technology breakthroughs

versus technology improvements. They also

benchmarked average project timelines. To

gauge how often researchers selected high-

value projects, the X-ray team interviewed

business division managers, determining

which initiatives had evolved into hot-selling

products or technology that could be licensed

or sold. The team also compared the laborato-

ry operations to industry best practices at the

electronics company’s major competitors.

The mapping and benchmarking exposed

three major areas for improvement. First,

many large projects had little to do with the

electronic manufacturer’s major strategic ini-

tiatives—for example, only 37 percent of the

lab’s employees were working on innovations

related to the company’s top technology efforts.

Second, the research portfolio wasn’t as

future-focused as lab directors believed; only

a sliver of their budgets looked at innovationsfive years out. Third, about 50 percent of the

time, lab directors picked ideas based on a

“gut feeling,” not a quantitative evaluation. In

general, the various labs were out of sync,

lacking common guidelines for selecting proj-

ects or consistent systems for ensuring that

they had strong support as they advanced

from concepts to product development.

As diagnostic team members prioritized

solutions, they weighed each opportunity,balancing potential improvements in research

performance against the cost. At the top of

the list of solutions: developing a centralized

technology strategy with corporate initiatives

guiding research project selection, funding,

and resource allocation. With investment

priorities at the corporate level, the electronics

manufacturer would better coordinate research

resources across the labs and align projects

with both lab and business unit needs. Another

priority: getting business units involved earlierin the process. That way, researchers wouldn’t

waste time on ideas that lacked support. The

research organization and individual labs would

continue managing projects, but each under-

taking would be regularly evaluated against

standardized performance benchmarks to

determine if it should move forward.

Five major

reasons for

Lean Six Sigma failures

• There’s a lack

of accountability

for aggregate

results, with

teams working

independently.

• Efforts aren’t tied

to corporate

goals, and

sponsorship is

diffused.

• The company

loses sight of the

goal in the heat

of training an

army of black

belts.

• The problem

returns after a

couple of years.

• Lean Six Sigma

efforts are wast

ed on areas that

will not make a

difference.



8


One of the most fundamental changes was

redefining the lab directors’ position to create

more visionary leadership. Instead of focus-

ing on daily research, the directors would beglobal managers, charged with scouting the

globe for futuristic technology trends and

rapidly developing leading-edge innovations.

And when they’d spot promising innova-

tions, they would lead efforts to acquire them,

saving the company time wasted on re-invent-

ing the technology.

With the completed X-ray in hand, black belts

set to work implementing the strategy and

process redesign over the next three months.Once these were in place, the electronics

company was able to quickly innovate in

response to market demands. With a clearly

focused research strategy and streamlined

processes, the company has increased its

overall R&D spending, focusing more on cut-

ting-edge and futuristic technologies. At the

same time, the electronics maker is optimiz-

ing its R&D dollars, saving costs through new

efficiencies, including outsourcing some work

to low-cost countries like India and Korea.

For an industrial supply company:

Redefining competition in the marketplace

After years as the market leader, the US divi-

sion of an industrial supply company found

itself losing both money and its competitive

edge. The division had dropped from first to

third place and hadn’t posted a profit in five

years. With both investors and members of

the board of directors calling for dramatic

action, the industrial division needed to

quickly develop a turnaround strategy. But

first the company had to answer two ques-

tions: Was it realistic to expect improved

profits? If profits couldn’t be improved, then

should the parent company retain or sell off

the industrial supply division? Before taking

action, management decided to use the diag-

nostic X-ray to develop a data-driven analysis

of the division’s competitive position.

The diagnostic team tackled the key issues

in two phases. First, to create a fact-driven

market share analysis, it compared competi-

tor returns against their market position andthen benchmarked their relative costs. The

team also looked at competitors’ plans to

increase capacity, conducted interviews with

them, and talked with division employees.

Second, it assessed the division’s prospects

for investing in a wholesale versus retail

channel, including a customer segmenta-

tion analysis, market-share forecasts and an

assessment of channel needs. Results from

this enterprise value stream mapping and

benchmarking allowed the team to create a

roadmap for cost savings and prioritize the

best opportunities for future growth.

They included closing the division’s most

expensive plants and replacing them with

plants offshore, a move that would reduce

costs by 15 percent to 20 percent. This was

a preemptive strike against competitors who

hadn’t begun to move production offshore.

All manufacturing and distribution opera-

tions embarked on a rigorous program of process flow re-engineering to reduce cycle

times, working capital, and operating costs;

it resulted in substantial improvements in

all key metrics in these areas—inventory turns,

for example, more than doubled. And, to

restore its market leadership position, the

division would heavily invest in its retail

channel—the market analysis showed that

when compared to wholesale, the division

would be a stronger retail performer and

could take advantage of expected retail chan-

nel growth. Both strategic initiatives deliv-

ered a strong turnaround: profit margins

shot up from zero to 9 percent and the

industrial division’s market share grew from

14 percent to 17 percent. Such is the power

of a diagnostic X-ray.



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